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Optimizing international portfolios with options and forwards

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Author Info

  • Topaloglou, Nikolas
  • Vladimirou, Hercules
  • Zenios, Stavros A.

Abstract

We develop a stochastic programming model to address in a unified manner a number of interrelated decisions in international portfolio management: optimal portfolio diversification and mitigation of market and currency risks. The goal is to control the portfolio’s total risk exposure and attain an effective balance between risk and expected return. By incorporating options and forward contracts in the portfolio optimization model we are able to numerically assess the performance of alternative tactics for mitigating exposure to the primary risks. We find that control of market risk with options has more significant impact on portfolio performance than currency hedging. We demonstrate through extensive empirical tests that incremental benefits, in terms of reducing risk and generating profits, are gained when both the market and currency risks are jointly controlled through appropriate means.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 3188-3201

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:12:p:3188-3201

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: International portfolios; Stochastic programming; Options; Forwards; Risk management;

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References

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Cited by:
  1. Matmoura, Yassine & Penev, Spiridon, 2013. "Multistage optimization of option portfolio using higher order coherent risk measures," European Journal of Operational Research, Elsevier, vol. 227(1), pages 190-198.

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